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These 3 credit card mistakes 'can set you back' financially, says advisor: Here's how to avoid them

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Key Points
  • Credit card companies can generally charge you a late fee of up to $30 for your first late payment and $41 for a subsequent late payment within 6 billing cycles.
  • "If you have a balance, you shouldn't be spending on your credit card, period," says SoFi financial planner Brian Walsh.

In the spirit of Fourth of July weekend, a gentle reminder that credit cards are kind of like fireworks: They're a great time when used correctly, but dangerous if the proper precautions aren't taken.

"Card users generally break down into two camps," says Brian Walsh, a financial planner at SoFi. "There are the people who carry a balance and have trouble managing their spending. And there are those who have a plan, pay down their whole balance every month."

If you fall into the first camp, tread carefully. Overspending on your credit card could lead to debt that compounds at a high rate of interest and that ultimately hurts your creditworthiness in the eyes of lenders. If you fall into the second camp, using one or more credit cards can be a great way to earn rewards and cash back for doing spending you'd be doing anyway.

In short: "Credit cards can provide a lot of value, but also a ton of downside that can set you back financially for a long period of time," says Walsh.

To maximize your chances of using your credit to your benefit — and to avoid dinging your credit score — avoid these three common credit mistakes, experts say.

Mistake 1: Missing your payment date

The goal with any credit card is to pay the entire balance on time each month. Yet even the most diligent and punctual card users are prone to the occasional hiccup, say, if their payment date falls on a busy workday followed by a happy hour that migrates to a second and third location (to cite an entirely random example).

The second your payment is late, your credit card company can generally charge you a late fee, currently up to $30 for your first late payment and $41 for a subsequent late payment within 6 billing cycles. Let things go a little longer, and things get worse. Fail to pay for 30 days, and your tardiness will show up on your credit report.

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The simple solution: Set up automatic payments on your credit card to make sure you never miss a deadline. But doing so requires some work, warns Ted Rossman, senior industry analyst at Bankrate. Autopayment "is not always great when it comes to credit cards," he says. Because the amount you pay can vary greatly from month to month, "you'll have to closely pay attention to the charges to make sure you're not overspending."

To alleviate this pressure you might feel from setting up autopay for your entire balance every month, experts recommend using autopay to cover the minimum payment. "That way, you guarantee that you won't miss your payment. You can kind of set that as a floor for yourself," Rossman told Grow. "Then you can manually log in and pay the whole amount."

Mistake 2: Chasing rewards while running a balance

If utilized properly, credit card rewards can be a huge financial boon, especially in an environment when rising prices on goods are eating into family budgets. Earning 6% cash back on groceries or 4% back on dining or takeout can help offset rising food costs, for example.

But if you're running a balance while earning those rewards, you may be coming out behind. "You don't want to be chasing 5% cash back if you're paying 17%, 20%, even 25%" in interest," Rossman told Grow. "It's easy to get upside down on that."

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Once you're behind, it may feel like earning some rewards for your spending is helping you catch up. But it could end up putting you further in the hole, points out Walsh. "Research shows that, subconsciously, you're willing to spend more on a credit card because it's les painful," he says. "And if you're in the process of paying down credit card debt, tracking your debt payoff becomes so hard because you're also spending on the card. It makes it much more difficult to see your progress."

If you do find yourself running a balance on one or more cards, there are plenty of methods experts offer to help you speedily pay down your debt so that you're no longer racking up interest. But no matter how you decide to pay, you'd be wise to do your spending in the meantime on something other than your card. "If you have a balance, you shouldn't be spending on your credit card, period," says Walsh. "You should be using debit or cash."

Mistake 3: Closing old cards

OK, you've set up good spending habits, established a great track record, and built a good enough credit score to qualify for a great rewards card. When is it time to close that starter card you used to build your credit?

"From a credit-scoring standpoint, the right answer would be, well, never," says Rossman. "With a few caveats."

The reason experts generally recommend avoiding cancelling old cards comes down to the way credit scores work. A big factor in determining your score is your credit utilization ratio — basically, the percentage of available credit you're actually using. As a rule, the lower your utilization the better.

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In an example provided by Rossman, consider a credit user with two cards, each with a credit limit of $5,000. On one card, the user has a $3,000 balance and on the other there's a $0 balance, meaning he's using $3,000 of his $10,000 available credit, for a ratio of 30%. "If you cancel one card, now you're using $3,000 out of $5,000 for 60%," he says. "This is where cancelling one of those cards can ding you right away."

Rossman points out that if the card you plan to cancel has a much lower credit limit than your new card, you're less likely to see a big dip in score. The same goes for people who keep their utilization super low in general. But for the most part, you're better off not cancelling old cards.

Instead, says Rossman, "Call the company and ask if you can switch to one of their other cards. If they can switch you to a different card, it doesn't ding your credit score in any way. And since it's not a new application there won't be any hard inquiry."

If there isn't another card within the same family that looks attractive, just put the card you don't want to keep using on the back burner, suggests Walsh. "Assuming there's not an annual fee, you might want to just leave it open," he says. "Set it to autopay and use it to pay off something small like your streaming service bill every month."

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